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Love And Economics

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PINEAPPLE
Anusorn Sutapan via Getty Images
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More recently than outrageous prices paid by royalty for pineapples in the days of Columbus ($5000 in current dollars), research by Stanford Professor Baba Shiv illustrates that the brain actually responds more pleasurably to stimulus if it thinks the item is expensive versus cheap. This was illustrated using wine. If you tell someone it is expensive, their brain literally responds more than if they are told it is cheap.

When we pay a lot for something, we enjoy it more because our brain thinks it's better but as the value, or perceived value fades, our passion fades away. If something has real virtue and a low price, it's perceived value is at risk.

Historically, there was a strong correlation between price and value. The price was driven by the bespoke/handmade aspects of producing goods and commodities. Transportation and communication were time consuming and costly. Technology has now changed this, yet we still don't get excited about things we perceive as inexpensive or cheap. Think about the price and desire of diamonds or caviar, versus chicken, eggs and flour.

Children offer us a more realistic perspective as they don't yet appreciate monetary aspects (cost). Hence why a child often plays with the box an expensive toy comes in, rather than the toy itself.

Society as a whole seems to shun cheap things and celebrate the expensive. I believe this aided or exacerbated by "brand". A well known, reputable brand implies quality and thus influences the price we will pay for something.

This may partly explain why expensive mutual funds from companies with billions in assets under management (AUM) still sell, yet new entrepreneurs in the financial space that create other more cost effective products have less assets. The best move for mutual fund companies is to try to grow their brand to play catch up with products like ETFs -- and it may indeed work. For like expensive things, we are willing to pay more for perceived value from brand.

At a boutique shop like Auspice, we know we can't compete with big brands. This is especially true given we don't have hordes of salespeople booking hundreds of meetings a day. However, by creating products of value, for a fair price, we believe the evolution of the buyer will dictate the terms going forward. The move away from high cost mutual funds to ETFs or low cost funds that reward performance is indeed occurring.

Moreover, the move from expensive financial advisors to robo-advisors is another example of this. It doesn't mean the traditional advisor doesn't add value. It means the market may only be willing to pay for the marginal cost of producing the good in the future. And if the good is cheaper (ETF versus mutual fund), then new buyers may demand the alternative tool regardless of delivery mechanism or historically acclaimed brand.

I love Pineapple. But not at $5000. It's okay if it's not Dole.

Better yet, I love to get a good deal on quality product, even if it's a brand most don't know. Yet.

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